Posts Tagged ‘fannie mae’

Strategic Default Is Only Ok If You’re Rich

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A recent article in the New York Times discussed how the rich are defaulting on their mortgage loans at an increased rate as compared to the rest of the population.  From the article:

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

In fact, the delinquency rate on investment homes with mortgages of a million dollars is more than double the rate of homes where the mortgage was less. For the million dollar homes, the rate is 23% as opposed to 10% for less expensive properties.

Yet, Fannie Mae and Freddie Mac, the largest lenders of residential mortgage loans under $500,000, are stepping up the rhetoric against strategic defaulters and taking steps to penalize them. 

Since Fannie Mae and Freddie Mac cannot take loans of greater than $729k, the result is quite obvious: to penalize the working and middle class for making the same smart money moves that rich people do and take for granted all the time.

Recently, the Republicans added an amendment to a bill that would forbid strategic defaulters from getting FHA financed loans, ever. Who gets FHA loans? Not the rich…these are solidly middle and working class financial instruments. 

Despite all of the moralizing about “keeping your word…you signed on the dotted line that you would pay…” and “foreclosures damage the community,” the real motivator for lenders here is fending off damage to the bottom line.  Let’s be clear:  if a high percentage of mortgage holders with loans under $500K were to default, this would really damage the financial health of the  banks.  It has nothing to do with morality or a sense of community and everything to do with profit. If these banks gave a fig about community or morality, they never would have created the incredible mortgage casino that brought us to this point.

Fannie Mae Fall Out

In a New York Times article today, lending experts sounded off concerns about Fannie Mae’s new hard line approach toward strategic defaulters.

For one, the experts say, in a time where the banks, including Fannie and Freddie, received big taxpayer bailouts, it is going to be hard to convince borrowers that they should end up stuck with the tab. For another, they wonder how Fannie intends to weed out those who strategically default from those with financial troubles.

The experts were also puzzled about just what Fannie intends to accomplish. Fannie spokespeople have said that they want to force people to work with their servicers on alternatives to foreclosure such as lender approved short sales and deeds in lieu. However, as I have pointed out  in yesterday’s post on the subject,  lenders and servicers have proven completely unwilling to work with borrowers on so called “foreclosure alternatives.”

Furthermore, this policy does nothing to address the negative equity problem, known colloquially as being “underwater,” where a borrower owes more on his home than it is worth. As the article points out:

About a quarter of homeowners with mortgages, or about 11 million households, owe more than their home is worth, and are potentially vulnerable to a strategic default. A flat or rising real estate market could encourage many of them to hold on; a declining market would suggest it was time to go.

While negative equity by itself does not cause foreclosures, it does encourage them in a down market. There are many reasons why someone, who isn’t having trouble paying his or her mortgage, may choose to walk away. One of them is because he or she has done the math and it doesn’t make sense to continue to “throw good money after bad.” Another could be that he or she needs to move because of changes in employment or other issues, and can’t sell the house because of how much he or she owes.

Whatever the reason, businesses make such choices all the time. Why is Fannie Mae trying to punish people for engaging in rational economic decision making? The answer is that neither Fannie nor any other large lender out there wants to come to grips with the reality that all they’re holding on to is worthless paper.

Fannie Mae’s Wrong Headed Gambit To Staunch Strategic Defaults

Last week, Fannie Mae issued a press release announcing that it was putting into place policy that would block strategic defaulters from getting a new Fannie Mae backed loan for seven years following the foreclosure.  In addition, Fannie Mae will also instruct its servicers to pursue deficiency judgments against borrowers where they are allowed.

Clearly, mortgage lenders do not like strategic defaults. They don’t like them because they’re kind of a wake up call to reality. Once lenders are forced to take back a home, they must face the immediate loss in value, which is why they want people to continue to pay. As long as they’ve got a paying mortgage, they can keep pretending the property securing the mortgage is worth the note value.

Yet, you’d have to have been living under a rock not to know that neither the lenders nor the servicers have done much to help homeowners avoid foreclosure. They’ve been recalcitrant when it comes to both loan modifications and short sales and many homeowners have, understandably, thrown up their hands and decided that walking away could save them a whole lot of stress and aggravation.

Instead of actually forcing its servicers to engage in meaningful work-out solutions with borrowers, Fannie Mae is, in effect, sticking its head in the sand and pretending that we aren’t in a foreclosure crisis at all.  The lenders do not want to face any losses at all, which meaningful work-out solutions would invariably force them to do, though not as steep as they would face in foreclosure.

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